Significant changes to the Annual Investment Allowance come into force in January 2021, which may change your mind about the best time to invest in plant and machinery for your business. Additionally, the rate of Structures and Building Allowance has now increased, making it more important than ever to engage with your adviser at the earliest stage of your building or refurbishment plans. 

Annual Investment Allowance (AIA)

The AIA is a tax relief which allows businesses (Sole traders, Partnerships and Companies) with spend qualifying for plant and machinery allowances (excluding cars), to claim a 100% tax deduction in the year. The rate of £1 million has been in force since 1 January 2019 and ends on 31 December 2020.

Budget changes

As it stands, the AIA is due to return to £200,000 for qualifying expenditure incurred from 1 January 2021, considerably lower than the current rate. There are transitional rules which are particularly strict when the AIA limit decreases, detailing when spending can occur within the financial year, which could be disadvantageous to businesses.

Action to take

We would recommend planning your capital expenditure carefully and getting in touch with your usual Johnston Carmichael contact if you are considering purchasing any high value capital assets. Delaying the purchase of capital expenditure, or delaying payments, to on or after 1 January 2021 could result in reduced tax relief.

An example in practice:

Company A’s year end is 31 March 2021. With the AIA limit decreasing on 31 December 2020, the maximum AIA the company will be entitled to is calculated by pro-rating the annual AIA allowance before and after this date. For the period 1 April 2020 to 31 December 2020, with the AIA rate of £1 million in force, the allowance will be £753,424 (£1,000,000 x 275/365). For the period 1 January 2021 to 31 March 2021, when AIA has decreased to £200,000, the allowance for spend will be £49,315 (£200,000 x 90/365).

This totals a maximum AIA of £802,739, but due to the strict transitional rules, Company A cannot spend this £802,739 at any time during the financial year and obtain full allowances. For the period 1 January 2021 to 31 March 2021, the allowance for spend is restricted to the pro-rated figure of £49,315.

If Company A incurred expenditure of £500,000 in the period to 31 December 2020 it would qualify for 100% AIA, saving £95,000 in Corporation Tax for the period.

If this same level of expenditure was incurred between 1 January 2021 and 31 March 2021, the Company would only be entitled to AIA of £49,315, plus the current year writing down allowance. Writing down allowances allow you to deduct a percentage of the expenditure from your profits each year. The current rate is 18%, so the allowance would be £81,123 (£500,000 - £49,315 * 18%) - resulting in capital allowances of £130,438 which gives rise to tax relief of £24,783. The Company would continue to receive the 18% writing down allowance on the reduced balance in the following tax years.

In this example, the difference between incurring expenditure in 2020 as opposed to 2021 is tax relief of £70,217 received upfront. Therefore, the timing of capital expenditure is crucial in the coming months.

Structures and Buildings Allowance (SBA)

The Structures and Building Allowance (SBA) came into force on 29 October 2018. This allows businesses (Sole traders, Partnerships and Companies) incurring costs of constructing or acquiring new non-residential structures and buildings to obtain tax relief on expenditure which would not otherwise qualify for capital allowances. The allowance provides relief at the rate of 2% per annum over 50 years on a straight-line basis for both Income Tax and Corporation Tax purposes. In order to claim SBA, the business must be carrying on a qualifying trade, have incurred construction costs, and entered into all construction contracts on or after 29 October 2018.

Budget changes

From 1 April 2020 / 6 April 2020 (Corporation Tax / Income Tax respectively), the rate of SBA increased to 3% per annum. This reduces the period over which relief will be available, to 33 1/3 years rather than 50 years. For businesses already claiming the allowance, there will be a ‘catch-up’ in the period to bring them in line with the new rate. As such, further tax relief will be available in the period for qualifying capital expenditure.

Action to take

We would recommend that businesses undertaking a new build or refurbishment in commercial property engage with us as early as possible to maximise claims under the SBA.

Get in touch 

If you'd like to discuss the key points in this blog, please feel free to get in touch with me at Michael.Murray@jcca.co.uk, or your usual Johnston Carmichael contact.